I did it! I got my taxes filed on time AGAIN. This may not seem so miraculous to many of you, but I’m on a 12 step program for late filers. Early each year I seek out a group of my fellows for support in my struggle: “Hi, my name’s Kent. And I’m addicted to Form 4868.” If you don’t know what Form 4868 is, well, I’m begging you, PLEASE, don’t start. You’ll tell yourself it will just be just this once, but . . .
In honor of having stayed on the wagon for another year, I figured I’d write about taxes.
Some weeks ago I received an email containing a comparison of taxes paid under Clinton v. Bush II. Sent by a good friend, I was one of many names on the list. In the message, my friend challenged someone to confirm these figures, which claimed to show deep reductions in taxes paid under George Bush, deep reductions that became proportionately smaller as income rose.
The subtext of the message was something like, “I know that Bush cut taxes. But only for the fat cats, not for regular people.”
When no one else replied, I took on the task.
Attributed to the Tax Foundation (which, to be fair, disavows the calculation on its website), the message claimed that taxes paid by single filers with $30,000 in income (and couples earning $60,000) saw a stunning 46% drop in taxes paid from Clinton to Bush. Seemed high to me and it is.
One significant problem with the analysis is that it doesn’t consider inflation. It is incorrect to compare the tax paid under Bush to the tax paid under Clinton for a person earning the same dollar income in each period. That’s because $30,000 bought more stuff in 2000 than it does today—about 20% more, in fact. Moreover, the federal tax brackets are adjusted for inflation. They change every year to prevent “bracket creep,” where inflation puts taxpayers into higher tax brackets even though their purchasing power hasn’t changed. To compare tax burden in these two years, we should compare the tax of a single earning $30,000 in 2007 to a single earning about $25,000 in 2000. And we should compare a married couple earning $60,000 in 2007 to a married couple earning about $49,000 in 2000.We must also adjust for changes in the standard deduction. The single tax filer could deduct $5,350 in 2007. The standard deduction for singles in 2000 was $4,400. Adjusted for inflation, the standard deduction for singles is about the same.
The tax law changes enacted in 2001 addressed the “marriage penalty,” however. The standard deduction for “married filing jointly” in 2000 was only two-thirds more than the deduction for a single filer—$7,350. The 2001 tax act made the married filing jointly deduction exactly twice the deduction for singles, or $10,700. Married taxpayers gained more under the 2001 tax changes than did singles.The broadest consequence of the new tax law was to reduce “marginal tax rates,” the rate we pay on an additional dollar of income. The change was most dramatic at the very bottom. We now pay 10% on the first $7,825 of taxable income, down from 15% under the old tax law. The poorest tax filers got a significant cut in rate. The top rate dropped, too, of course—from nearly 40% on taxpayers with more than $288,350 in taxable income (regardless of filing status) to 35%. The dollar value of the rate cut was dramatically greater at the top than at the bottom, of course. If a single earner with income of $7,000 got a 10% raise, the tax savings from the change in law was $35. Someone with taxable income of $300,000 saved $1,350 on a 10% increase in income.
Assuming the standard deduction, I compared the tax burden on single taxpayers for 2007 income levels of $10,000 through $75,000. For married taxpayers filing jointly, I looked at 2007 income levels exactly double that of the singles—$20,000 through $150,000.
While higher income taxpayers certainly save more in dollar terms, taxpayers at the bottom of the income scale save the most in relative terms—34% for singles and 44% for married couples. And married couples save more than singles across the range, due to the change in the standard deduction. The savings at the top are lower in relative terms (singles earning $75,000 save 10% v. 11% savings for singles earning $30,000).
There are other issues, of course. A number of changes were made that clearly favor the wealthy—the rates on long-term capital gains and on dividends were both reduced and the estate tax was dramatically cut. Furthermore, the deductibility of various expenses changed, altering the tax burden for individuals who itemize deductions. I’m not going to attempt to address the more complex changes in this space, many of which targeted very specific classes of taxpayers. On balance we’d be better off with a tax system that is simpler and more transparent, without the countless special exemptions for one group or another, typically those who are best at playing political games to warp the tax code in their favor.
As the “Bush tax cuts” expire at the end of 2010, we can expect a steady flow of disingenuous chatter about the consequences of allowing them to expire or the differential impact of one element or another. At this simple level, however, allowing them to expire would affect more than the fat cats.
Note: The above article was initially published in a column for the Rochester(NY) Business Journal. The information below provides additional details.
|List & other info|
|2000 tax table||http://www.irs.gov/pub/irs-pdf/i1040tt.pdf|
|2000 1040 instructions||http://www.irs.gov/pub/irs-prior/i1040–2000.pdf|
|2007 tax table||http://www.irs.gov/pub/irs-prior/i1040tt–2000.pdf|
|2007 1040 instructions||http://www.irs.gov/pub/irs-pdf/i1040.pdf|
NOTE: My column took a very simplistic view of this issue. A more sophisticated discussion would address the share of GDP taxed by taxpayer class, changed in tax incidence (tax paid as share of income) by rate class, etc. The attached spreadsheet reproduces IRS tables on tax incidence by rate class for 2000 and 2005 (2007 not having been released).
My Chicago-based brother, Barry Gardner, offers links to some additional sources:
The Congressional Budget Office reports various taxes as a share of GDP for various years, although not in the same publication. Here’s a very informative retrospective that includes tables through 2000 (showing personal income tax totaling about 10.2% of GDP & responsible for about half of federal revenue: http://www.cbo.gov/doc.cfm?index=2807&type=0. There are many interesting tables in this one. This document reports that PIT as a share of GDP had fallen to 7.3% by 2003, rising to 8.0% by 2006: http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf
As the inaccurate information mentioned in this blog was originally attributed to the Tax Foundation, it seems only fair to see what they have to say on the topic in their own voice: http://www.taxfoundation.org/blog/show/22958.html and http://www.taxfoundation.org/research/show/151.html
They include links to a number of thoughtful pieces on the subject.
Finally, again courtesy of my brother, I recommend a piece by JOHN F. COGAN and R. GLENN HUBBARD in the April 8, 2008 edition of the Wall Street Journal titled “The Coming Tax Bomb” which discusses the consequences of the tax increase that would result from simply allowing the 2001 and 2003 tax law changes to sunset.
OK, not finally: I ran out of space in my column to rail against politicians for their disingenuous passage of “temporary” tax law changes. Why do these tax reductions sunset? Because the budget projections in these tables–-http://cbo.gov/budget/data/budproj.shtml-–would look fabulously worse if revenue didn’t turn up in 2011. I’ll acknowledge that a different set of tax law changes would better suit my view of the world (I’d reinstate the estate tax, for example), but the practice of making major legislation “temporary” is destabilizing and irresponsible.
Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal April 11, 2008